HomeFeatured BlogsWhy the Drop In Oil Prices Caught So Many By Surprise

Why the Drop In Oil Prices Caught So Many By Surprise


It’s not just Wall Street banks such as Goldman Sachs Group Inc. that got it wrong. Energy consultants and even the U.S. government didn’t foresee the sharp slide in oil prices, which have tumbled 25% since June.

Goldman shocked the market yesterday with a call for U.S. prices to fall to $70 a barrel in the second quarter of 2015. Barclays just released its second price update in three weeks, and other banks are releasing lower forecasts at least monthly.

What did they miss?

The risk of discord within the Organization of Petroleum Exporting Countries and the possibility that violence in some oil-producing nations wouldn’t interfere with oil production.

For the past three years, oil production in the U.S. has been booming but Brent, the global oil benchmark, has largely held above $100 a barrel. That’s because sanctions on Iran and unrest in Libya, Nigeria and elsewhere kept oil off the market, allowing supply and demand to stay balanced even as U.S. production grew. Heading into this year, it looked like a pretty good bet to assume that supplies outside the U.S. would stay constrained, and many analysts called for Brent to hold above $100 again in 2014.

This summer, those assumptions fell apart as Libyan production came roaring back, Kurdish output looked set to rise and Iraqi exports held steady despite an insurgency. At the same time, weak demand in China and the eurozone came into view. The combination of these factors pressured prices lower.

Then, the widely shared assumption in the oil market that OPEC would collectively cut production to keep prices high started to look shaky. Saudi Arabia, the world’s biggest oil exporter, has indicated in recent weeks that it is comfortable with a lower oil price, and prices have fallen in response to these signals.

Citigroup ’s global head of commodities research, Ed Morse, predicted in a Barron’s article in March that oil prices could fall to $75 a barrel in the next five years, a price target that looks far more feasible now than it did then. But even Citi didn’t anticipate that prices this summer could fall so far so fast.

The price revisions have been embarrassing for banks, whose customers, including energy companies and traders, rely on these forecasts for their own deals and assumptions.

The U.S. Energy Information Administration was also caught by surprise. The agency, which releases month-by-month forecasts, called for Brent to average $102 a barrel this month in the forecast released in December. By July, the EIA was saying that Brent would average $110 a barrel in October. In its latest forecast, released Oct. 7, the EIA settled on a $97 a barrel average for this month.

But as EIA Administrator and former Deutsche Bank analyst Adam Sieminski joked in a presentation in New York last week, his forecasts have been right only about 60% of the time.

Brent is currently trading around $86 a barrel and has averaged $88.42 a barrel so far this month, according to Factset.

This entry passed through the Full-Text RSS service – if this is your content and you’re reading it on someone else’s site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.

(via WSJ Blogs)

No comments

leave a comment